Twinkynomics: A Case Study In Romneynomics

Hostess Brands is out of business. It’s in bankruptcy because its bakers union would not accept terms of a new contract which the company’s hedge fund (a.k.a. vulture fund) debt holders demanded. These funds wanted as the price of keeping the company alive that its bakers accept an 8 percent pay cut and a 30 percent reduction in their benefits. The 18,000-member union stayed on strike instead, and now its members don’t have jobs.

The hedge funds in this deal do not include Bain Capital, Mitt Romney’s private equity firm. But…,

But this is the kind of bargaining that Bain-like funds make, or try to make, to secure their own profits. And though we can’t know how the hedge funds holding Hostess’ debt will ultimately end up from this deal as the bankruptcy process plays out — we can’t know because these funds don’t have to report the bargain prices they actually paid for Hostess debt — it’s possible they will do quite well as the company’s assets (including its Twinkies, Devil Dogs, DingDongs, etc. products) are bought up by others.

So what is the big lesson to be learned here? It’s this: Multiple this Twinkies deal by several thousand and you get a notion of what Romneynomics, honed at Bain Capital, might have looked like for American workers generally if the Mitt Man had been elected president. Union member “moochers” who refuse to labor for minimum wage would get the ax while hedge gamers could still squeeze out their profits.

That’s the law in Job Creator Land. A place where Twinkynomics and Romneynomics rule. Where if you don’t come in Sunday, don’t bother coming in Monday.

Perhaps with Mitt Man behind us now, we can move beyond this approach to running an economy. Let’s hope so. Americans deserve better.

NOTE: This author’s new comic novel, The Bellman’s Revenge, is now available on Amazon in both print and ebook formats. Check it out if you get a chance. It’s really very funny.

If a company has to die, so be it. Die. Go bankrupt. But if the only way it can carry on for awhile longer is to cut employee wages by 8 percent and benefits by 30 percent, then what I think should happen did happen — it went down.

This is America. In Third World countries lousy jobs of any kind with lousy pay and few if any benefits are often actually a step up in that country’s economic evolution. Here, this is a step down in our own evolution as an economy.

The funds who thrive on this kind of thing are destructive for a very simple reason — they divert capital from truly productive avenues. An economy where the vultures are the dominant species is one that doesn’t have much of a future.

Dr. J, I agree. The company has been slowly going under for years, due largely to it’s out dated products and lack of consumer demand.
The difference is that the ” vulture funds” in so many of these cases are indstrumental in implementing it’s demise. They don’t just swoop in later after negotiations have been exhausted, they orchestrate them in the hopes of gaining as much money as possible for themselves.
They are mercenaries who really have no allegiance and certainly no concern for anyone other than themselves.

Remember one of the earliest new breed “vulture capalists” – Carl Icahn? Bought TWA in 1985 and saddled TWA with $540 million in debt through questionable acquisitions. TWA filed bankrupty in 1992 and he left the company a year later. TWA still owed him $190 million, so he took the payment in airline vouchers and founded LowestFare.com. TWA never really recovered and was eventually bought by American. TWA’s home base in St. Louis lost two major hubs – TWA and Ozark Air and has never really recovered. St. Louis Lambert Field was in the midst of building a new airport within the old airport and tore down hundreds of homes. Now they have a nice new runway which is rarely used and half the air traffic they did in their heyday. Much of the area where the homes were torn down is just an overgrown remnant of a neighborhood. Of course, Icahn made out like a bandit.

I simply point this out as an example and that the impacts of vulture capitalism won’t just stop at Twinkies.

Hostess was in bankruptcy for 5 years before the “vulture” capitalists from Ripplewood assumed the debt. Ripplewood would do much better if they could keep the company intact but they were not going to invest anymore money in a venture they didn’t think made financial sense. Without the labor savings they are willing to cut their losses. How much money are you required to lose as an investor? Ripplewood will most likely take a significant hit because most of what they will be selling is trademarks not actual infrastructure. The debtors will get paid first before the unions or Ripplewood. Ripplewood didn’t act to make money, they just were not going to loose anymore. For that they are vultures? Lets also look at what they were requesting. 8% pay cut now that would go p by 4% over 5 years and the employees would pay an increased share of the medical benefits, 20% I understand. Hostess came out of bankruptcy in 2009 with some concessions from the unions and about 700 mill in debt and it looked promising for the company but then the recession hit.The employees felt they had given enough and the owners couldn’t make the company profitable as is. This is kind of how it is supposed to work. The company was on the bubble and the employees didn’t want to work for less. Why trash either side? Pretending this is a corporate raider situation is obviously absurd. So lets come up with a new term without a real definition so we don’t have to support any claims but can just spew venom with abandon.

Oh you know I forgot to mention while Hostess wanted those concessions they were also offering some on their side too. A 25% equity stake for employees and 2 seats on the board of directors. If the union really believed in the company that would seem to be worth quite a bit.

There are all kinds of hedge funds and to my way of thinking some of them perform a really vital and worthwhile task — they invest new capital in a company, improve the management, and work with the workforce in productive ways that may require some give by workers — and I emphasize the “some” here. That’s not what this Hostess bankruptcy is all about.

The parties at the table with unions here weren’t capital investors. They were hedgers that bought company debt at prices one has to believe were deep discounts (no sane party would pay anywhere near par). These vultures, and that’s what they are, might well profit from bankruptcy when company assets (whatever these are) are sold off. The other hedge fund that put capital in Hostess probably won’t, and the unions certainly won’t, but the vultures likely will.

Frankly, I’m more than a little tired of people who refuse to distinguish between things to make a point. They oppose “taxes” without focusing on who will pay these taxes. They oppose cutting some “entitlements” without bothering to distinguish between which kind and how cuts play out in the real world. Pretending all “hedge funds” are good or bad in their effects is part of this same unfortunate approach.

To my way of thinking the end game hedgers in this Hostess deal were very, very naughty. Why pretend otherwise? And why lump them together with hedge funds that actually save companies and their workers?

Michael, I’m still confused what behavior wouldn’t be “naughty.” It would be great if they bailed the company out, committed themselves to turning it around, and eventually succeeded–all without having to ask workers for these sacrifices.

That’s a high expectation. If the funds operated that way, they’d go broke, and companies like Hostess would probably have to close their doors much earlier in the bankruptcy process.

Hostess never would of come out of bankruptcy if not for these “vultures”. And unlike what has been said, they have actually invested cash into the company as well as carry the massive debt, 700 mil, that accompanied Hostess out of bankruptcy. Ripplewood will most likely loose money in almost every possible case. That’s fine they took a chance and lost. Making them the evil corporate raider is counter to fact and bad for business besides.

Too bad people these days are so low information when it comes to the history of and reason for unions in general. If they knew more they would realize who advocates in their interest and who views them as something to exploit, something expendable.

Actually Ripplewood is only the latest in a series of equity firms to grab stakes in Hostess. The Unions there have made multiple concessions in the past, not co-incedentally these concessions come with equity firm entrance into the equation. This isn’t the first time they have been asked to help cover costs. The various financial games that the equity firms have been playing with Hostess since the early 90’s is whats responsible for their upside down balance sheet. Each one comes in, saddles them with loans to repay themselves almost immediately for the initial investment, then ride it out until they can do so again. Ask yourself, whey were all these firms continuing to pump money into Hostess if its such a loser,even after its bankruptcy filing in 2004? Here’s a hint, it wasn’t because they are nice guys looking to help out a down on its luck national brand. No, because there was more risk free money to wring out of it.

They will make this sound like its the stubborn unions refusing to make concessions during a bad economy that is causing the death of this brand. It simply is not. I assure you, Ripplewood has already made its initial investment back and then some. Its the high fiance version of that game Big Pauly played on the restaurant in “Goodfellas”.

Actually Ripplewood is only the latest in a series of equity firms to grab stakes in Hostess. The Unions there have made multiple concessions in the past, not co-incedentally these concessions come with equity firm entrance into the equation.

Kind of misleading. Ripplewood was a part owner of Interstate before they went into bankruptcy in 2004. They, Ripplewood, then paid 130 mill and assumed over 700 mil in debt including 360 mil in new loans to become majority owner when International became hostess coming out of bankruptcy. Where concessions made? Sure because if the unions hadn’t made them the equity firms who Interstate owed 700 mill to wouldn’t of let them out of bankruptcy. That’s right the court wouldn’t of allowed them out of bankruptcy if the holders of the debt didn’t come to a new agreement and without concessions there was no way Hostess would ever be profitable enough to pay them back. They made concessions and the lenders gave the company a chance. Now what is the bad part?

Ask yourself, whey were all these firms continuing to pump money into Hostess if its such a loser,even after its bankruptcy filing in 2004?

After coming out of bankruptcy pretty much just Ripplewood put cash into Hostess. They put an additional 40 mil in before the company filed for bankruptcy in 2012 and lenders gave another 30 mill when they first started negotiating for new concessions in early 2012 but both said they wouldn’t invest anymore unless more concessions were made. As to why people would bother, well they hoped the company could turn around and Hostess had something like 2 bill in annual sales. If the company could of been turned around it would of been very profitable. That is what everyone was betting on and why they pumped money into Hostess. How can the company who makes Twinkies fail?

Ripplewood has already made its initial investment back and then some.

No they havent. They have been trying like the devil to keep Hostess but no longer have much of a say in what happens anymore. With the strike they can’t fulfill their obligations to the loans and unions. The lenders will get first crack at any money that comes from a sale and since the unions don’t care about saving Hostess they aren’t going to worry about it. Silver Point and Monarch, the two biggest holders of debt, may not loose any money but that’s why they gave them money in the first place. They are assured of getting their money first or they wouldn’t of given money when the company was on the rocks. According to fortune both those companies will lose money on the bankruptcy.

Right now, according to sources with knowledge of Hostess’s debt structure, Silver Point and Monarch each hold Hostess obligations with a market value of between $50 million and $100 million. Those sources also say each hedge fund probably paid somewhere between $125 million and $175 million for that debt. So even with losses to date, both hedge funds have ample skin in the game

Now Ripplewood is last in line to get any money so the idea that they would make money is absurd and has no connection to fact.

In trying to shed costs, Hostess is gunning for what are known as MEPPs — multi-employer pension plans — which it is required to participate in under its labor agreements with the unions.
MEPPs, which grew in popularity back in the union glory days of the 1950s and ’60s, were designed for companies within an industry to share pension burdens. There are nearly 1,500 MEPPs in the country, covering more than 10 million workers. These mammoth defined-benefit plans — employers, not workers, make the contributions — were especially attractive to unions, as they allowed workers to move easily between companies.
Trouble with MEPPs is, if some employers go out of business, the remaining companies have to pick up the shortfall in funding benefits. When there are too few employers left standing, the fund is in trouble. According to a March research report by Credit Suisse, MEPPs are now underfunded by $369 billion. A third of the 40 MEPPs to which Hostess contributes are among the most underfunded plans in the country.
At the bargaining table, week after week, Hostess and the Teamsters have gone at it over the MEPPs, which Hostess contends are at the heart of its woes.

So Hostess isn’t just paying for pensions on it’s employees, but with the thinning of it’s industry, they are paying for massive numbers of people who never worked for them. If Hostess was just made to fund for only their employees the pension contribution would be 25 mill a year vs over 100 mil like it is now.

There are other issues to of course. Like that bread trucks can’t deliver pastries, because it might cut a union driver, and other complicated requirements that just can’t work in today’s enconomy

Assuming a company’s debt is not the same thing as giving them the money for that debt. For starters, best estimate now is that Hostess is carrying $860Mn in debt on revenues of around $2.5Bn annually. How much do you think the current equity guys paid for that debt? I assure you it wasn’t $860Mn. And these are debts that are likely incurred as a result of the equity companies themselves taking care of their initial investments, and with each subsequent hand off to a new equity holder. Hostess’s credit is used to pay off the purchase prices, which they then carry forward until its either paid off or the company goes under. Looking at Hostess Brands Inc history, this appears to be the case here. Of course, its those darn union pensions that are killing it!! Lol. The fact this debt financing game is legal is a testament to the skill of private equity lobbyists.

Which is all to say, the equity guys have made their money. It is still structured in such a way as to appear that they are holding massive debt and about to be screwed, but the only people about to be screwed are the employees of Hostess. That’s the whole point of these deals, you are using THEIR credit to pay you back right away, leaving them to pay the debt incurred for their own buyout.

Hostess’s credit is used to pay off the purchase prices, which they then carry forward until its either paid off or the company goes under. Looking at Hostess Brands Inc history, this appears to be the case here.

Slam, that’s an interesting charge that could tip my opinion of the whole thing. Any sources you can point me to?

Ripplewood had an equity stake in interstate before the filed bankruptcy in 2004. They then put in 130 mill to get interstate out of bankruptcy and without them the other lenders would not of agreed to allow the debt to carry over. During the time when Ripplewood was trying to make Hostess profitable they spent another 100 mill, 70 then 30, of their own cash. Heck even the lenders gave cash for an increase in equity in 2001. The debt was because Hostess was losing money. Sure they would of been in a better place if they had no debt but they would be losing money anyway. That is right, no matter how you dress it up, they were losing money. And I notice no one bothered to address the legacy labor costs which even the bankruptcy judge said were unsustainable. Ripplewood is looking at a total loss here and both the major lenders will take hits and lose money on trying to keep Hostess alive.

Not trying to say the money men have clean hands but picking anyone out and claiming they are the good guys is just BS. Plain and simple the unions were more concerned with the MEPPs than keeping Hostess and those jobs going. That is their right but pretending it wasn’t a major factor of Hostess closing is a joke. Maybe they would of closed anyway so it didn’t make sense for them to give on those issues. Fine, but how is that different from the lenders not wanting to flush more money by investing in a company they feel is unsustainable?